NCLAT upholds penalty against Santoshi Finlease for malicious insolvency petition
In a recent ruling, the National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal filed by Santoshi Finlease Private Limited, upholding a penalty of ₹10 lakh imposed by the National Company Law Tribunal (NCLT) for filing a malicious and fraudulent insolvency petition under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. The case, which involved allegations of collusion and misuse of the insolvency process, has drawn attention to the misuse of the IBC for ulterior motives.
Background of the Case
The dispute arose when Santoshi Finlease, through its director Yug Mittal, filed a Section 7 application against Mothers Pride Dairy India Pvt. Ltd. (Corporate Debtor) for non-payment of a loan amounting to ₹4.89 crore, which had escalated to ₹9.32 crore including interest. Santoshi Finlease claimed that the loan was disbursed between July and November 2019 under a loan agreement dated August 17, 2019, with an interest rate of 18% per annum.
However, the State Bank of India (SBI), the primary secured creditor of Mothers Pride Dairy, alleged that the Section 7 petition was filed with malicious intent to stall its recovery proceedings under the SARFAESI Act. SBI argued that the petition was part of a larger scheme by the Mittal family, who controlled both Santoshi Finlease and Mothers Pride Dairy during the relevant period, to obstruct SBI’s recovery efforts.
Key Findings of the NCLAT
The NCLAT, in its judgment, upheld the NCLT’s decision, finding that the Section 7 petition was filed with fraudulent and malicious intent. The tribunal noted that the loan agreement relied upon by Santoshi Finlease was essentially a “Mittal-to-Mittal” transaction, as both the appellant and the corporate debtor were controlled by the same family during the relevant period.
The tribunal observed that the Mittal family members, who were directors in both companies, orchestrated the loan arrangement to create a false debt claim. The NCLAT also highlighted that the alleged loan was not a genuine financial debt but rather an equity infusion aimed at acquiring control over Mothers Pride Dairy. The tribunal found that the ₹92 lakh transferred by Santoshi Finlease to the corporate debtor was not a loan but an investment to secure directorship and control.
Malicious Intent and Penalty
The NCLAT agreed with the NCLT’s conclusion that the Section 7 petition was filed with the sole intention of pushing Mothers Pride Dairy into Corporate Insolvency Resolution Process (CIRP) to obstruct SBI’s recovery proceedings. The tribunal noted that this was not the first attempt to initiate CIRP against Mothers Pride Dairy, as earlier petitions had also been dismissed.
In light of these findings, the NCLAT upheld the penalty of ₹10 lakh imposed by the NCLT, to be paid to the Prime Minister’s Relief Fund. The tribunal emphasized that the IBC should not be misused for purposes other than genuine insolvency resolution.
Legal Precedents and Implications
The NCLAT referred to several key judgments, including Innoventive Industries Ltd vs ICICI Bank and M. Suresh Kumar Reddy vs Canara Bank, which establish that an application under Section 7 of the IBC cannot be rejected if a default has occurred and the application is complete. However, the tribunal distinguished the present case, noting that neither debt nor default had been established, and the petition was filed with malicious intent.
The tribunal also cited Wave Megacity Centre Private Limited vs Rakesh Taneja & Ors., where it was held that if a corporate applicant initiates CIRP fraudulently or with malicious intent, the adjudicating authority is not obligated to admit the application, even if debt and default exist.
Conclusion
The NCLAT’s ruling underscores the importance of ensuring that the insolvency process is not misused for ulterior motives. By dismissing Santoshi Finlease’s appeal and upholding the penalty, the tribunal has sent a strong message against the misuse of the IBC for purposes other than genuine insolvency resolution.
The case also highlights the need for greater scrutiny of related-party transactions and the potential for abuse when the same individuals control both the creditor and the debtor. The NCLAT’s decision is expected to serve as a precedent in future cases involving allegations of fraudulent or malicious initiation of insolvency proceedings.
Also See: NCLT directs Jaiprakash Associates to continue with single resolution plan option
